Donald Trump’s tax cuts, effectively a massive economic stimulus, is expected to have a only short-term effect on growth, according to the the latest projections by the Congressional Budget Office, while saddling the nation with massive deficits that could have a negative effect for years to come.
Economic growth this year is expected to average 3.1 percent before falling back to 2.4 percent in 2019 as business investment and government purchases recede, the new report says.
The 4.1 percent growth rate in the second quarter, which Trump loudly touted, was a short-term blip fueled by a rebound in consumer spending after a weak first quarter and a surge in agricultural exports. But those trends are expected to either fade or reverse.
What’s more, this year’s growth rate will be only 0.6 percentage points faster than actual growth in 2017.
Long term, from 2023 to 2028, real GDP is projected to grow by about 1.7 percent each year. The expiration of middle class tax cuts is part of the reason.
Another by-product of the Trump tax cuts is the buildup of excess demand in the economy.
“That excess demand will put upward pressure on prices, wages, and interest rates over the next few years. From 2023 to 2028, real GDP is projected to grow by about 1.7 percent each year, according to CBO Director Keith Hall.
The trend is expected to continue, at least through 2022. The update states:
In CBO’s forecast, the growth of actual output slows markedly after 2019 because higher interest rates, along with the slower growth of federal outlays projected under current law, restrain demand. As the excess demand dissipates, the unemployment rate rises and inflation and interest rates fall. By 2022, the excess demand in the economy disappears.
The administration’s tariff war is also producing drag on the economy.
When the CBO completed its latest forecast in July, the new Trump tariffs affected less than 1.5 percent of the total value of U.S. trade. “However, trade policy has already changed since early July and may continue to evolve, so the effects of new tariffs may become more substantial and have a larger effect on the economy than CBO accounted for in its current projections,” Hall says in a statement.
Meanwhile, the nation’s deficit, which could affect the government’s ability to borrow and boost inflation, is soaring.
The federal deficit for July totaled $76.9 billion. For the first 10 months of the fiscal year it rose to $684 billion, up almost 21 percent compared with this time in 2017.
The surge has been caused by increased spending and reduced tax receipts. The administration now estimates the deficit will top $1 trillion in 2019, CBS News reported.
Trump vowed to cut the deficit when running for president in 2016, regularly bashing Barack Obama’s economic policies. He also promised to wipe out the national debt, but the chances of that happening anytime soon are non-existent.
The $1.5 trillion tax cut over the next decade benefits corporations and most high-income wage earners.